Wednesday, August 26, 2009

US economic mobility

Economist View links to a comment from the Understanding Society blog on how US economic mobility is far worse than most think, and much lower than other developed countries. In fact, the "United States ranks second to last among Great Britain, US, France, Canada, and Denmark when it comes to the rate of income improvement over four generations for poor families."

How do we know this? By looking at the correlation between parent and child income, education and class. As Mark Thoma remarks, "in a society in which there is substantial equality of opportunity across all social groups, we would expect there to be little or no correlation between the SES of the parent and the child."

I have suspicions though that correlation is not a well defined method of observing equality of opportunity because being at the top and losing your wealth is much less likely than being at the bottom and gaining wealth. I make this claim for 2 reasons, the first one Thoma mentions but does not fully explore the implications of:

1. Every nation allows wealth to be passed from generation to generation, such as paying for education or wills.

2. Once people have money, they have more resources to take good care of their money.

So, we would expect there to be a very strong correlation between those at the top income, which America has a lot more of that most other nations. The real question is, whats the correlation between those at the bottom?

The report quoted by Understanding Society is by Tom Hertz, formerly of American University, and is available here. It goes into a lot of detail on US stats, but when looking at international comparisons it only looks at overall correlation of income. Hertz gets his data though from Miles Corak (paper available here), who is much more cautious about making strong conclusions from the results.

Don't get me wrong, mobility is very hard. Besides myself, I know of only one other person who came from a low income/low education background and has pulled himself out. I also suspect its worse in the US than most people think.

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A short bio

I am a consultant with the World Bank in DC and a recent PhD graduate of economics at the University of California, Irvine. My research is on conflict and post-conflict development, and the economic impact of the environment and environmental change. I am currently working on a randomized impact evaluation for the World Bank in the post-conflict area of northern Uganda.

My two favorite quotes

>> If you want to build a ship, don't drum up people to collect wood and don't assign them tasks and work, but rather teach them to long for the endless immensity of the sea. - Antoine de Saint-Exupery

>> One of Einstein's colleagues asked him for his telephone number one day. Einstein reached for a telephone directory and looked it up. "You don't remember your own number?" the man asked, startled.

"No," Einstein answered. "Why should I memorize something I can so easily get from a book?"